By the time Axion International Holdings Inc. decided to seek bankruptcy protection, the Zanesville, Ohio-based recycled plastic railroad tie maker had become desperate.
Axion could not attract any outside financing or credit and even most of its own private investors had turned their backs.
Except for one.
Axion, in filing for Chapter 11 protection in the U.S. Bankruptcy Court in Wilmington, Del., indicated investor and former board member Allen Kronstadt is willing to provide debtor-in-possession financing of $2.2 million to keep the company afloat as it reorganizes.
Bankruptcy jargon can get confusing, but the plan put forth by the company in its filings essentially gives Kronstadt an inside lane to control a reorganized company in exchange for this new financing. Kronstadt “holds secured priority liens on substantially all of the debtors' assets, which liens the debtors believe are valid.”
Kronstadt lent the company millions over time, including approximately $5.2 million in secured debt that has priority over other company debt, Axion said. He resigned earlier this year as a board member.
Chapter 11 bankruptcy protection allows a company to continue operating while it reorganizes under the protection of the court.
“Over the past eight to nine months, the debtors have not been able to obtain sufficient equity or debt financing to maintain production activity or expand manufacturing capacity to meet current demand for their railroad ties and construction and temporary road mats,” a court filing states.
“Additionally, the debtors have curtailed production which has led to recent inefficient manufacturing processes that have resulted in increased costs producing a further drain on the debtors' cash flow,” the filing continues.
As of the end of September, the company had accumulated losses of more than $86 million, and the filing states access to capital “has always been extremely limited.”
Axion is a publicly traded company and its shares were going for 1 cent each following the bankruptcy filing news. The company traded as high as 56 cents per share during the past year.
For the past three years or so, the company “relied upon the continued financial contributions from a concentrated group of investors (including Kronstadt) who owned a substantial portion of the debtors' debt and equity securities.”
But by March, all but Kronstadt were unwilling to invest any more due to the company's financial problems, the filing states.
Attempts to raise outside capital were fruitless, and the company calls its financial position “dire” in the bankruptcy court filing.
Debtor-in-possession financing, the company said, “will enable the debtors to purchase raw materials, stabilize operations, and begin restoring critical relationships.”
The financing also gives Kronstadt a first priority lien on all current and future assets of the company as the company pursues a potential sale.
Axion uses post-consumer and post-industrial plastics such as high density polyethylene and glass-filled polypropylene to make its products designed to compete against wood, steel or concrete.
But faced with a lack of financial liquidity, the company was “forced to reprocess slow-moving and obsolete products into new products and to liquidate inventory at lower sales prices in order to induce customers to purchase and/or accept shorter payment terms.”
It was only about two years ago that Axion acquired the assets of plastics recycler Y City Recycling of Zanesville in an attempt to better control its supply chain. Y City had been supplying recycled plastic for Axion's products. Axion paid a local Zanesville bank $3.56 million for equipment, inventory and supplies related to Y City at the time. Y City, itself, began operations after buying the assets of another recycling firm, Coll Materials Group LLC.
In an interview with Plastics News in November 2013, then-CEO Steve Silverman said the deal to acquire the Y City assets would help the company grow.